Customer vs. Owner: Who wins? You decide!

I am very lucky to live in a beautiful city in the North West of England.

Yes… I am not actually there as often as I would like, but when I am, I do not take for granted that my children are being raised in a lovely environment. Founded as a Roman Fort in 79 AD, Chester is one of the best preserved walled cities in Great Britain.

With museums, a theatre, a Roman amphitheatre, a river, a canal and mediaeval building a plenty, Chester is a not just a great place to live, but a fantastic city to visit – especially if you like a bit of history.

So why am I telling you this?

I must confirm that the focus of my blog is not switching from Customer Experience to travel! I am telling you about my home city by way of setting the context for this article. As well as being rich in culture, Chester has also become a well know destination for those who prefer to sample the riches of the stomach, in addition to history and the arts.

As a family of self-confessed ‘foodies’, the Goldings have a number of favourite eateries that never fail to satisfy our taste buds. In fact, it will not surprise you, but all of our favourite restaurants in Chester have become so, not just because they always satisfy our taste buds, but because the whole experience never fails to be consistent – consistently excellent.

As I travel so much, when I am able, I will take the opportunity to take Naomi, the long-suffering Mrs Golding, to our absolute favourite – a culinary delight in a suburb of Chester called Hoole. Often referred to as ‘Notting Hoole’, less than a mile from the city centre, this small area feels very much like the cosmopolitan part of London after which its name is mimicked. To be fair, Sticky Walnut would not look out of place in the real Notting Hill – or even Cannes for that matter.

Tucked in between takeaways and retailers in a small parade of shops, Sticky Walnut can only be described as a real gem (I suspect I am starting to sound like a restaurant reviewer at this stage!!). We have never been disappointed in all the times we have visited (which is many) – from the service, to the food, to the wine – Sticky Walnut is a restaurant I would recommend to anyone visiting the North of England, let alone Chester itself.

Sticky Walnut is not just renowned for its food though. Owned and run by restaurateur Gary Usher, the unbelievably talented chef has also become a little bit of a social media phenomenon. Known for his love of a tweet or two, Gary is also not ‘backwards in coming forwards’ when reviews of his restaurants are placed on TripAdvisor – which finally gets me to the point of this post!

Gary is very passionate about and very protective of, his business and its staff – quite rightly so.

If he feels that criticism is unfair or unwarranted, then he is extremely comfortable in making his view known – if necessary, in as public a manner possible. Only last week, a customer of Sticky Walnut decided to place the following review on the website that has become the nemesis of many a business owner – TripAdvisor:

It is a very interesting review for several reasons. Firstly, the customer gave the restaurant a rating of three – higher than I would have expected in relation to the content of the review. The tone is also of note – sarcastic in the extreme – one wonders exactly what his motivation was. However, if we take his words as read, then it does appear he had an experience that failed to meet his expectations on more than one occasion.

If you were the owner of Sticky Walnut, what would your response have been? Would you have apologised? Would you have explained what happened in a calm and discreet manner so as not to upset the apple cart? Would you have focused on the final paragraph – ‘what was otherwise a lovely evening, with otherwise good food, and otherwise pleasant and efficient staff’ (this gentleman has a thing for the word ‘otherwise’) – and suggested that he have a dish ‘on the house’ when he next returns?

While you are mulling over those questions, let me share with you how the real owner of Sticky Walnut, Gary Usher, responded on TripAdvisor:

Now I bet you did not expect that!! It is a fascinating response that has already divided opinion in the local area. Yesterday I delivered a Customer Experience Masterclass for one of Dubai’s biggest banks. One of the delegates asked a common question – ‘Is the customer always right?’ – I suspect that Gary Usher would answer that in the negative.

I can confirm that customers are most definitely NOT always right – but this ‘story’ is a brilliant example of their being two sides to any story – in this case, who was right and who was wrong? You probably want to know what I would have done – I shall tell you.

To me, one of the fundamental basics when it comes to good customer experience management, is communication. If you want a customer to be under no doubt as to what is going to happen in an experience when something unexpected occurs, you must make sure they understand the consequences or benefits of a decision being made.

Whether the fish was smelly or not – and I can concur that Sticky Walnut only uses the freshest of fresh ingredients – there will always be instances when customers do not like something. As we were not there at the time, what we do not know is how the interchange with the restaurant manager went. If the customer was told – we will not charge you for the sea bream, but you can order something else from the menu which you will be charged for – then there can not be any argument. If the customer was just fishing (excuse the pun) for a free meal (which does happen) – he would have expressed his disdain at that point. If no comment was made about charging for the replacement dish, then the customer has obviously just made an assumption that it would be complimentary – the wrong assumption in this case.

There is never an excuse for a customer to treat staff badly – that is completely unacceptable. Leaving without paying for something you have consumed is also technically theft – especially if no agreement was made for the dish to be complimentary in the first place.
Other than being crystal clear with setting expectation, in all honesty, if this were my business, I would probably have not charged the customer for the replacement dish – or have given the group a complimentary round of drinks (to the same value). Whether the customer was right or wrong, it would have diffused the situation, avoided any public argument and the review would never have landed on TripAdvisor.

However, I was not there and this is not my business – so I am talking purely hypothetically. I very much empathise with Gary. This restaurant is not his job – it is his passion; his vocation; his livelihood – and when he feels it is being denigrated, then he is perfectly within his rights to stand up for his product, his staff and his beliefs.

I can tell you this – I will be returning to Sticky Walnut – many, many times (if Gary will allow us). Their food is and always has been wonderful – yet if I am ever in the situation where something is not to my liking, I will take the time to politely explain why to the lovely staff that make the restaurant tick. I doubt this will happen though – it never has in the past!

So, let me ask you the question – in the battle of customer versus owner – who do you think is right?

Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas. You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment. Your investment decision is logical to you. But you have choices: You could a) simply invest in a traditional index like the MSCI EAFE, b) invest in a fund that systematically emphasizes a single factor (like a value fund) that only buys specific stocks related to that factor, or c) invest in a developed fund that blends several factors together, like the JPMorgan Diversified Return International Equity ETF (JPIN). What is the best choice?

Investing in a traditional international market capitalization index like the MSCI EAFE is not a bad choice. It has delivered nice returns for a US investor, especially uncorrelated outperformance in the 1970s and 1980s, and helped to diversify a US-only portfolio.

Your second choice is to invest in one particular factor because it makes sense to you. Sticking with the example of a value strategy, you might believe a fund or index that chooses the cheapest or most attractively valued stocks based on metrics like Price to Earnings (PE) is best.

You could go find a discretionary portfolio manager who only buys stocks he deems to be cheap. Typically the concept of “cheap” is based on some absolute metric that the manager has in mind, such as never buying a stock with a PE greater than 15. If there are not enough stocks that are attractive, he will hold his money in cash until he finds the prudent bargains he seeks. This prudence also obviously risks possible underperformance from being absent from the market.

The alternative is to buy a value index or fund that systematically only buys the cheapest stocks in a particular investment universe. So if there are 1000 investable stocks available, the index ONLY buys the cheapest decile of 100 stocks and is always fully invested in the 100 securities that are relatively cheapest. This is an investment approach that a discretionary manger may disdain. The discretionary value manager may look at those same 100 stocks and think they are pricey. But nevertheless, academic research has shown that always being fully invested in the relatively cheapest percentiles of stocks in the US has produced superior returns over many decades.

Such a portfolio is called a “factor” portfolio. Why the name? In the early 1960s, academics introduced the concept of beta and demonstrated that individual US stocks had sensitivities to, and were driven by, movements in the broad market. In the early 1990s, academic research began to show that other “factors” such as value and size also drove US stock returns. Since then, several factors have been identified as driving individual stock outperformance: value, size, volatility, momentum and quality. Stocks that are cheaper, smaller, less volatile, have more positive annual returns and higher profitability have historically outperformed their peers. It turns out these factors also work internationally.

Of all the factors, value is the factor that has been the best known the longest (even before it was academically identified as a “factor”), thanks to the books of Warren Buffet’s teacher Ben Graham. And if you look abroad at an array of developed global markets and create a value index and compare it to its simple market capitalization weighted brother, the historic outperformance of value has been stunning. Until recently.

While there was some variability by country, on average from the mid-1970s up until 2005 a value factor portfolio in a developed market outperformed its market cap weighted index by about 2% a year. That’s a lot. By contrast, since 2005, the average developed country value portfolio has underperformed a market cap indexes by about -40 basis points. Which is the danger of investing in one factor. It may not always work at every point in time.

So if investing in one factor like value runs the risk of underperforming, how about a multi-factor international developed equity portfolio?

Below is a breakdown of individual factor portfolios’ performance in international developed equity markets since 2005, an equal weighted factor portfolio as well the performance of the MSCI EAFE as our performance reference. Note that, for the last 13 years, value has been the poorest factor by far, while the others have handily beaten the EAFE. An equal weighted portfolio of all 5 factors, while not as optimal as some of the individual factor results, beats the EAFE by 1.6% and has an information ratio, or risk adjusted returns that are superior by 37%. The equal weighted factor portfolio also has the advantage of not having to predict which factor will work when, so even when a factor like value does not beat the market, the other factors can pick up the slack.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

The equal weighted factor portfolio has one other advantage over the market cap weighted alternative. Note in the chart below how well the portfolio outperformed in the 2008 crisis, so it tends to do relatively well in highly volatile sell offs.

SOURCE: MSCI, Data as of January 31, 2018. Past performance is no guarantee of future results. Shown for illustrative purposes only.

While it’s not inconceivable that one or two of these factors could erode, or underperform for a stretch, the fact that you have exposure to multiple factors in a portfolio that seems to do especially well in crises suggest the multi-factor blended portfolio remains the most attractive way to invest in developed markets.

So, when asked the question: Multi-factor or not multi-factor? The data speaks for itself.

DEFINITIONS: Price to earnings (P/E) ratio: The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

DISCLOSURES: MSCI EAFE Investable Market Index (IMI): The MSCI EAFE Investable Market Index (IMI), is an equity index which captures large, mid and small cap representation across Developed Markets countries* around the world, excluding the US and Canada. The index is based on the MSCI Global Investable Market Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. This methodology aims to provide exhaustive coverage of the relevant investment opportunity set with a strong emphasis on index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large, mid and small capitalization cutoff points are recalculated.

Investors should carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read the prospectus carefully before investing. Call 1-844-4JPM-ETF or visit ww.jpmorganetfs.com to obtain a prospectus.